Reserve Bank: Financial Stability Report, May 2005

The Reserve Bank
today released its Financial Stability Report, a
twice-yearly report that assesses the robustness of the New
Zealand financial system.

Reserve Bank Governor Alan
Bollard commented: "The New Zealand financial system,
overall, is well placed to weather a possible slowdown in
the economy."

Dr Bollard said that New Zealand's major
banks had sound balance sheets, very low levels of problem
loans, and had been recording strong earnings. The
Australian parents of those banks are similarly placed.

Dr Bollard added that "finance companies have grown rapidly,
including in some higher risk markets. They offer generally
higher returns to investors, but are more exposed when the
economy slows. As such they currently represent a greater
risk. But, despite their rapid growth, finance companies
remain only a small part of the financial system.

Dr
Bollard added that while the financial system as a whole was
in good shape, the risks to investors, households and some
firms had been increasing. Household and farm sector
indebtedness has continued to increase.

"These
developments could result in some financial strains if the
economy slows, the boom in agricultural export prices does
not last, or the New Zealand dollar appreciates further," he
said.

Another possible development Dr Bollard noted was
banks seeking to maintain recent years' strong growth in
lending and earnings by taking on higher risk business.

"The Reserve Bank will be watching to ensure that the
banks maintain appropriate credit standards, and that they
have adequate capital to support the risks they take," Dr
Bollard said.

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